 "Illustration: Binay Sinha")
Eight years after the global financial crisis in 2008 that sent the world economy into a recession and financial markets in a free fall, top family-owned business groups continue to struggle with high debt and poor profitability. In many instances, these diversified conglomerates are in worse shape than they were five years ago.
Combined debt for the country’s top family-owned groups has grown faster than their revenue and operating profit in these five years, leading to a steady decline in their financial ratios even as growth and profitability remain lacklustre.
At 0.9 times, the combined net debt to equity ratio for the top 10 family-owned conglomerates by revenue was at a five-year high in FY16. Revenue reported a drop, and the net profit, adjusted for exceptional gains was up a modest three per cent in the previous financial year.
The data also show that most groups are now disproportionately depend on their star performer to keep their head above water. For example, the Tatas depend on cash from Tata Consultancy Services; Reliance Industries relies heavily on its refinery and petchem business while UltraTech Cement is the rock-star in the Aditya Birla Group. In Mahindra, the farm equipment division is the group cash cow; Vedanta relies on cash from Hindustan Zinc.
The analysis is based on combined financials of the country’s top 10 family-owned conglomerates ranked by their revenue in FY16. It includes groups such as Tata, Mukesh Ambani (Reliance Industries), Aditya Birla Group, Mahindra, Vedanta, Adani, Anil Ambani, JSW group, Bajaj and Murugappa group. The analysis is based on the listed companies of these groups, excluding their financial services firms. The sample also excludes listed subsidiaries of listed group companies, to avoid double counting. The analysis is restricted to diversified groups and excludes sector-specific family-owned enterprises such as Bharti Airtel, Motherson Sumi and Sun Pharma, among others.
Companies in the sample, reported combined net profit (adjusted for exceptional gains and losses) of Rs 80,103 crore in the previous financial year, marginally up from Rs 74,226 crore in FY12. Combined operating profit was cumulatively up 50 per cent during the period from Rs 1.71 lakh crore in FY12 to Rs 2.58 lakh crore in the past financial year. Most of this was, however, eaten up by debt servicing, leaving little on the table for shareholders or future investments.
Interest cost for the sample has grown at a compounded annual growth rate (CAGR) of 22.4 per cent during the period, while their gross and net debt doubled during the period growing a CAGR of 16.5 per cent during the period. At the end of FY16, these 10 groups’ had a combined gross debt of Rs 9.8 lakh crore on their books, up from Rs 4.6 lakh crore in FY12. Adjusted for cash and equivalents on their books, net debt during the period grew from Rs 3.1 lakh crore to Rs 6.8 lakh crore. They attribute it to a slump in the global commodity cycle and borrowings to fund large capital expenditure in the past few years. Combined fixed assets for the sample doubled during the period.
Analysts, however, say that not all debt went for capex. “Many companies also borrowed to fund their current operations or plug gaps in their cash flows. They were betting on future growth to take care of liabilities but a delay in recovery spoiled their plans,” says Dhananjay Sinha, head — institutional equity, Emkay Global Financial Services.
He expects an improvement in the financial ratios of business groups in the near-term to a mild demand recovery in the domestic economy. “There could be slight improvement in the profitability of these groups over the next
12-18 months but it might not be enough to solve their financial woes, given their size. They have no option but to exit some of the struggling businesses, just as second tier groups are being forced to do by banks,” he adds.
Tata group firms' leverage has fallen since FY10
At 15 per cent, the Tatas earned one of the highest return on capital employed (RoCE) among the country’s top family-owned diversified business groups. During FY16, the top 17 group companies collectively earned profit before interest and taxes (PBIT) of Rs 63,889 crore, with nearly Rs 4.25 lakh crore worth of capital (debt plus equity) employed in their business on average.
Tata Motors and Tata Steel, the most asset-heavy Tata companies, accounted for 60 per cent of the group’s total capital employed in the previous financial year. They are followed by Tata Consultancy Services (TCS) and Tata Power. The shine in Tata’s group balance sheet, however, is largely due to TCS, the group’s most profitable company. In the previous financial year, TCS accounted for nearly half of the group’s combined PBIT and nearly 70 per cent of the combined net profit.
Excluding TCS, the group’s return on capital employed drops to 8.7 per cent, only 15 basis points higher than the previous low of 8.56 per cent seen during FY13 and just a notch above the group average interest cost. In the past financial year, based on their average gross debt and interest expenses, group companies’ average interest cost stood at 6.3 per cent. Group companies (excluding TCS) had average gross debt of Rs 2.36 lakh crore last year and it cost them Rs 14,787 crore in interest cost.
The group’s big capital guzzlers such as Tata Steel, Tata Power, Tata Chemicals, Indian Hotels and their telecom ventures continue to earn sub-par return on their capital, making Tata Sons increasingly dependent on TCS to keep the group financially solvent.
The silver lining is the declining leverage of the group. The combined net debt (net of cash and equivalents) declined to a nine-year low of 0.74 in the past financial year. At its peak, the leverage ratio was nearly 1.3 in FY10. This is largely due to the growing cash pile of TCS and Tata Motors, and a slowdown in group’s capital expenditure. The group’s fixed capital grew only eight per cent last year.
While this is encouraging, the group will have to work hard to earn more returns from large-ticket investments made in the past.
Aditya Birla Group: Hit by capex and drop in commodity prices
The Aditya Birla Group has reported a steady decline in return on capital employed (RoCE) and return on equity (RoE) in the past five years while its debt grew at a rate of almost 30 per cent each year. At 9.1 per cent for 2015-16, the Birla group is far behind the business group topper Tatas, which had RoCE at 15 per cent. The RoCE of Aditya Birla Group has steadily declined from 11.6 per cent in 2011-12 to eight per cent by 2014-15.
Group executives said these metrics should be looked at in the context of massive investments undertaken and that too at a time when commodity prices crashed to record lows. In the past five years, the group has invested close to Rs 60,000 crore in creating capacities in cement and aluminium. This investment also includes Rs 20,000 crore in buying cement units from the Jaypee group. Idea Cellular is also investing in buying spectrum and increasing its 4G based network across the country.
Revenue of the group rose by 9.4 per cent, operating profit by 11.5 per cent, while net profit rose by 2.5 per cent at a compounded average growth rate in the past five years. As a result, the dividends have grown at the rate of 5.8 per cent during the period.
With the Grasim-Aditya Birla Nuvo merger, analysts said the promoters would be able to raise stake in group holding companies without spending any cash. The merged entity would own majority stake in UltraTech Cement (now held through Grasim), currently the group’s most valuable company and its cash cow.
For FY16, the group’s net debt was Rs 1,21,246 crore on revenues of close to Rs 1,99,279 crore. Its operating profit grew from Rs 22,175 crore in FY12 to Rs 34,794 crore in FY16.
Going forward, while gains from the capex in Hindalco and UltraTech will start flowing in, the challenge for the group would be to manage the large capex of Idea Cellular without stretching group finances. The entry of Reliance Jio has impacted the profitability of incumbent operators, forcing them to step up investment in network and spectrum.
The tide is turning for Vedanta
Vedanta, the global natural resources major, has been battling debt problems, as it was caught on the wrong end of the down-cycle in commodities. Its operating profit declined 18.4 per cent a year in the past five years. Its interest costs surged
41 per cent a year during this period, while return on capital employed fell from 21.8 per cent in FY12 to 0.3 in FY16.
The Vedanta group bought Cairn India in 2011, and funded it through debt. Consolidatd debt grew from Rs 999 crore in FY11 to Rs 3,741 crore in FY12. However, the crash in crude oil prices played spoilsport.
Even as Sterlite (the aluminium and copper major) merged into Sesa Goa (iron ore major) in 2013 to form a stronger entity, the merger didn’t help as metal prices kept fallling. Its operating profit, which was adequate to cover interest costs, however declined further.
Consolidated Ebitda fell from Rs 21,460 crore in FY14 to Rs 2,892 crore in FY15 before rebounding to Rs 6,711 crore in FY16 but interest costs continued to rise (Rs 5,704 crore in FY16), leading to a net loss in FY15 and FY16.
The silver lining for the group is that commodity prices of iron ore, base metals and oil have started to rise. Subsidiary Hindustan Zinc has been the star performer in the group as it generates large amounts of cash.
The merger of Cairn India into Vedanta will reduce debt substantially. Analysts at HSBC say that there will be significant reduction in leverage. As of June, Vedanta had debt of Rs 77,000 crore at the parent level (including Cairn acquisition debt), whereas Cairn had net cash of about Rs 23,600 crore. Also, Vedanta owes about Rs 8,400 crore to Cairn, which it will not have to pay after the merger.
Analysts at Credit Suisse say that once Cairn's $3.7 billion of cash becomes fungible, Vedanta could either deleverage or command better refinancing terms, given the potential improvement in credit rating. Also, Vedanta’s FY18 Ebitda would cover interest and capex. The tide seems to be turning in Vedanta’s favour.
Tough conditions for Mahindra, especially tractor biz, could end soon
Mahindra is among the few business houses spread across diverse industries such as automobile, software, real estate, financial services. Automobiles contribute to 73 per cent of the group’s assets (excluding M&M Financial Services). While it is exciting to operate across diverse sectors, the strategy hasn’t been too rewarding, especially the past two years. This is mainly because of its bread-and-butter business going through a rough patch (especially tractors, due to weak monsoons in 2014 and 2015) — standalone sales and profits thus haven’t moved much since FY14. The recent ban on diesel vehicles in Delhi region this year has added to the woes. Businesses such as software and real estate are also under pressure.
All this is reflecting in the group’s financials. The consolidated M&M entity accounts for most of the group’s financials and holds significant stakes in Tech Mahindra, Mahindra Holidays and Mahindra Lifespace. Consolidated return on capital employed has consistently fallen from 14.8 per cent in FY13 to 10.2 per cent in FY16. Constant infusion of debt in the group in the last five years has skewed returns profile.
At the standalone level, M&M saw a 21 per cent compounded annual growth in debt during FY11-16. Revenue growth of the group has grown at a slower pace than debt, resulting in declining return ratios in recent times. M&M standalone revenue has stayed flat since FY14. Revenues of Mahindra Lifespace, Mahindra Holiday and Mahindra CIE have also been volatile in the last five fiscals, and profitability has not been too steady. But, given that the group would benefit from a good monsoon season, there is hope that the tough business conditions, particularly for tractors, should end soon. This can reverse its fortunes.
Mukesh Ambani group firms weighed down by capex
In the Mukesh Ambani group, most of the new forays such as retail, telecommunication and shale gas have been done through the flagship company, Reliance Industries (RIL). RIL’s return on capital employed (RoCE), which has been declining since FY11, stood at 9.6 per cent in the previous financial year.
However, this low return has to be seen in the light of the huge capital expenditure (capex) plan the company has under way in Reliance Jio and petrochemicals. The success of its telecom venture, which has absorbed a large chunk of the company’s capital invested, will have a major impact on the capital efficiency. Analysts are more confident that the new capacities in the petrochemicals segment, which are expected over the next 12-15 months, will improve return ratios significantly.
Between FY05 and FY08, its RoCE averaged at about 18 per cent. In the past 15 years, the group reported its highest returns on capital invested at 19.2 per cent in 2004-05, according to Capitaline data.
The group’s RoCE has been on a declining trend since FY11, the year the company started its major capital expenditure plan. Since then, its RoCE has fallen and stood at 9.47 per cent in 2014-15 before inching up in the past financial year.
“The decline is largely due to the company’s huge capital expenditure plan. Ideally, the returns should improve from here, but it would depend on how much they are able to deleverage and how much earnings contribution happens from petrochemicals because there is a delay in commissioning of new capacities. Jio will also continue to be an overhang,” said an oil and gas analyst who did not wish to be identified.
Part of the group’s large capital expenditure plan, is a $12 billion investment in petrochemical and refining business it started five years ago and another Rs 1.5 lakh crore in its telecom venture Reliance Jio. The company also looks to invest another Rs 1 lakh crore in its digital business in the next four years.
Analysts also point out the group’s diversification into other segments has not given handsome returns. The company’s foray into organised retail, for instance, so far has showed modest returns. For the past three financial years, the organised retail business clocked returns in single digit. The return on capital employed for business segments have been calculated as a ratio of the segment’s profit before tax to the total capital employed in that segment. Its latest foray into telecom, analysts say, is also expected to take a couple of years before it starts reporting profit for the group.
